For decades, the Dogs of the Dow theory of stock market investing has often proved to be a propitious method of stock selection that yields good results for investors.
The theory holds that the 10 stocks in the Dow Jones Industrial Average (DJIA) that end any given year with the highest yields end up outperforming the index the following year. Underlying the theory is the reasoning that components of the DJIA are well-established companies that tend to raise their dividends in an orderly, methodical fashion.
The theory of the so-called Dogs coming back after a year of underperformance was popularized by money manager Michael O’Higgins in 1991 when the economy was more cyclical than it is today. He and others postulated that companies exhibiting high dividends also had stock prices that suffered partly because their operations had encountered temporary setbacks and were likely to recover over the next year.
In recent years, the theory has been tested as the market has rewarded high-growth companies with low dividend yields to a far greater degree than in previous cycles. However, it should be added that the performance of growth and value stocks closely mirrored each other in 2021 and many expect higher-yielding stocks sporting juicier dividends to perform well next year as the economic recovery gains steam.
With one day left in 2021, here follows the likely Dogs of the Dow in descending order.
10. JP Morgan Chase (JPM)
Dividend Yield: 2.5%
The nation’s largest global bank just edged out Cisco, which has a dividend yield of 2.4%. JP Morgan is expected to be a beneficiary of rising interest rates in 2022.
9. Intel (INTC)
Dividend Yield: 2.7%
Intel has been plagued by production problems afflicting the entire semiconductor industry. It has also been outmaneuvered by smaller, more nimble competitors. But all chip manufacturers will enjoy brisk demand continuing into 2022.
8. Coca-Cola (KO)
Dividend Yield: 2.9%
Coca-Cola derives almost 40% of its revenues from out-of-home gatherings, like restaurants, movie theatres and sporting events. Accordingly, it could be poised to see stronger sales from a post-pandemic reopening.
7. Amgen (AMGN)
Dividend Yield: 3.5%
One of the biotech industry’s original players, Amgen has been largely absent from playing a role in finding cures and treatments for Covid-19. Like other Big Pharma companies, it also faces patent expiration problems.
6. Merck (MRK)
Dividend Yield: 3.6%
Merck has attempted to develop treatments for Covid-19. However, it has repeatedly been overshadowed by rivals like Pfizer, which has produced more successful vaccines and oral treatments.
5. Walgreens Boots Alliance (WBA)
Dividend Yield: 3.8%
Walgreens Boots Alliance is solidly positioned to benefit from aging demographic in America and Europe. But it faces ferocious competition from giants like Walmart and mail-order pharmacies.
4. Chevron (CVX)
Dividend Yield: 4.6%
Chevron is now the only energy concern among the Dow’s 30 components. In a sign of the times, ExxonMobil was dropped from the Dow after 92 years in August 2021 and replaced by Salesforce (CRM). With a sound balance sheet and oil prices rising, Chevron’s dividend looks safe.
3. Verizon (VZ)
Dividend Yield: 4.9%
Like other telecom giants, Verizon is facing secular challenges from a host of streaming rivals. Consequently, its business will require major capital infrastructure investments.
2. IBM (IBM)
Dividend Yield: 5.0%
With its mainframe computer business in long-term decline, IBM has tried to reinvent itself as a major player in software and information services. However, its management is discovering just how crowded these fields are.
1. Dow (DOW)
Dividend Yield: 5.1%
Dow has undergone several restructurings over the last decade. With the ESG movement gaining steam, it has also attempted to reconfigure its business to make it more environmentally acceptable.
